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Legally speaking

By Howard Jarvis. 20.05.2011

Second-year law students at the library of the Eurofaculty of Latvia State University
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Tark Grunte Sutkiene is a full service business law firm. We spoke to Partner Ivars Grunte and Senior Associate Andra Rubene about what foreign investors should watch out for when setting up a company in Latvia.

Tark Grunte Sutkiene is a full service business law firm mainly focused on providing advice on complex commercial transactions and settlement of disputes, covering both public and private law in Estonia, Latvia and Lithuania. The firm has over 80 attorneys and lawyers and a total staff that reaches over a hundred. We spoke to Partner Ivars Grunte and Senior Associate Andra Rubene about what foreign investors should watch out for when setting up a company in Latvia.

Confidence is finally returning to the investment environment in Latvia. But how quickly is it coming back?
Rubene: Confidence is coming, unquestionably, together with optimism that sustained growth will now return. But we’re eager for more. We got used to the kind of the national growth levels we had five years ago when we led Europe.
Grunte: We’re seeing some positive events in the wider region, such as the introduction of the euro in Estonia, which can only be good for Latvia. The Baltic market is like a united market for most investors from much of the rest of the world. I got a request recently from a client in the US asking for more information on Lithuanian law. When I said that I live in Latvia, he corrected himself and said, “Yes, sorry, I mean Latvian law.”

And your company now covers the three Baltic countries, as a single entity.
Grunte: Yes, it’s a one-stop shop, with offices in each of the three Baltic capitals, covering the three markets equally.

Do international companies that approach the Baltic market for the first time ask for your advice on which country in particular to direct their investment or place their regional office?
Grunte: Usually they’ve already studied the market well and know where they’re going to set up. Often they’re equally attracted by the three markets but want one office. And typically they put that office here in Riga as the biggest and geographically most central city and also one with a fairly transparent business environment.

How easy is it to set up a company in Latvia? Are taxes comparatively light or heavy?
Grunte: Latvian employment taxes are favorable and the registration process for setting up a limited liability company is quite fast. But one problem in Latvia is that taxes have changed too often compared to Estonia and Lithuania, with every passing government wanting to make its own amendments – VAT, income tax, it’s hard to keep up with the changes. The impact on a retail company, for example, can be problematic. But it’s also true to say that the process of establishing a company in Latvia is easier and faster.

What are the key legal differences between Latvia and the rest of the EU and North America in setting up a business?
Rubene: Compared to common law countries like the US and England, we have civil law in line with much of the rest of Europe. Our clients haven’t experienced any unwelcome surprises. It’s not like the “wild” 1990s anymore when you could open a company simply with a share capital of $50,000. Latvia has been part of the European Union since 2004 and its laws are in line with those in Brussels.
Grunte: Sometimes we hear that it’s much easier to register a new company in the UK, but it’s not necessarily true. You can open a company in Latvia in two days if you follow the formalities and plan the right documentation.
Rubene: But of course, not everyone is so well organized. A week is a typical time period. Another factor is whether it is done through a company based in the EU or an offshore company. With an offshore company, now that money laundering laws are tight in Latvia it’s not easy to register unless you’re prepared to show all of the true beneficiaries. The large banks are careful with this, anyway.

What happened as Latvia prepared to join the EU in 2004 – was it a case of one being adapted to fit the other?
Rubene: Yes, Latvian law – which was already modeled on German law – was adapted to EU law. It was a long process. New laws are drafted in line with EU law.

How is demand for legal services changing as the Latvian economy improves? Which sectors are you seeing M&A activity in, for example?
Rubene: Banking. We’ve been involved with restructuring at Latvijas Biznesa Banka and we’ve just received a new assignment restructuring another bank – we can’t yet divulge the name – with the aim of attracting more investment and increasing the share capital. In two months it will all become known, but it’s a very sensitive topic at the moment.
Grunte: There’s huge interest in the ownership of hypermarkets right now. A number of clients have contacted us about this, about commercial real estate.
Rubene: Also renewable energy. There’s interest in classical energy too, but especially in renewables. Companies are interested in building factories, obtaining EU funding to do so, in biomass, wind and solar. One company is now close to building a factory for biomass. And we’re seeing interest in wind from Nordic companies already operating wind farms in Estonia.

Are you seeing more demand for legal services in M&A, or is there still plenty of demand for restructuring?
Grunte: There are more M&A deals taking place, definitely, but there’s also still restructuring. One prominent retail company approached us with a need to solve its financial problems, then found a way of surviving for a year, but recently came back to us with the same request. The crisis is still there. But, of course, that means now is the right time to invest in Latvia. The economy is improving, and prices will get higher.

Latvia is seeing a lot of investment in real estate coming from Russia and the CIS, especially since the residence permit law was passed last year. Are there worries about this to the point where Latvia may do something to change this law?
Grunte: Not any time soon. Most of the real estate deals stimulated because of the promise of permits have been in Jurmala or Riga city center where prices were already high. This law has helped push forward the real estate market, which had reached complete stagnation throughout 2009. Around 100 permits were granted in 2010, after around LVL 80 million (€115 million) was invested in the Latvian economy, mostly in real estate.
The clients we’ve seen related to this issue just wanted to pay the minimum to get the residence permit. Not everyone is concerned with buying up property. If they are then it’s not the kind of property that the average Latvian could afford to buy anyway. I was recently in Moscow. Clients there are interested in this law, in obtaining a residence permit in an EU country, but not many of them actually go through with it.
It’s interesting that in summer, during the New Wave music festival in Jurmala, which is hugely popular in Russia and the CIS, transactions increase radically. Then these wealthy new property owners don’t come back to Latvia until the following year.
Rubene: There are also Latvian taxes to bear in mind. The seller pays 15% corporate gains tax, while the buyer pays 3% stamp duty. That 3% can amount to quite a sum, so those involved in the transaction sometimes think of imaginative ways round it. They declare a small price for the property and declare the rest of the value as the interior decoration and objects. But the authorities are checking up on this and spotting the mismatch, and a number of applications for the permits have been postponed due to this.

What local pitfalls are there facing foreigner investors when opening a business in Latvia?
Grunte: One surprisingly common mistake is buying an indebted local company, failing to look over the most recent accounting, missing something, and inheriting previously accumulated debt. No all debt is secured. Public registers show debt, but this can be after balance sheet liabilities. In the economic boom it was common to guarantee purchases and in the recession these are being exercised.
The advice is – always carefully evaluate the price. If possible, add to the contract that the seller is liable. Financial due diligence – that’s number one. You can state in the contract that the former owners are liable.
Rubene: But if you establish a new business, of course, you won’t encounter these problems. Although you have to demonstrate your real prospects, it is a smooth process.
One interesting problem we’ve found recently concerns the retail sector. Some foreign investors have found that now they have to pay for playing music in supermarkets, something that hasn’t happened before. This is something they could possibly face claims for down the line. They have to consult with two associations – Akala, which protects composers’ IP rights, and Laipa, which acts on behalf of the performers. Often we’re seeing that a client has paid for one but not the other.


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